Labor Market Institutions and Unemployment Dynamics in Transition Economies

The paper proposes and solves a matching model of job reallocation between the public and the private sector, and it shows that cross-country differences in labor market institutions are broadly consistent with the dynamics of unemployment and real wages in transition economies. Two main results arise from the analysis. First, higher unemployment benefits speed up job destruction in the state sector and private job creation at the early stages of the transition, but they increase unemployment in the long run. Second, higher minimum wages can theoretically speed up the reallocation process without affecting the long run equilibrium.